Dispute resolution

India makes further changes to companies, money laundering and procurement laws

Published on 24th Jul 2020

The Modi government continues its reform of India's financial and corporate laws as it looks to fight white-collar crime and improve business conditions in the world's fifth-largest economy


Moves to decriminalise provisions of the Companies Act and to shield independent directors from unnecessary prosecution are part of a broader government initiative to make it easier to do business in India. Meanwhile, anti-money laundering law amendments will help the fight against business crime. New procurement rules giving preference to domestic cybersecurity products aim to boost India's national and economic security.

Decriminalisation of corporate offences

The Companies (Amendment) Act, 2019 has decriminalised 16 corporate offences involving procedural and technical lapses. Company directors and officers are no longer at risk of imprisonment in respect of the decriminalised provisions, and any penalties imposed in respect of these defaults are of a civil, and not criminal, nature. These include filings in respect of annual returns, financial statements, notices for alteration of share capital or redemption of preference shares, issuances of shares at a discount, resignation of auditors etc.

The proposed Companies (Amendment) Act, 2020 (which is currently awaiting notification and enforcement) decriminalises an additional set of offences where they relate to share buybacks, to the appointment of auditors, and to audit committees as well as nomination and remuneration committees.

Takeaway: By de-criminalising procedural and technical defaults, the amendments will support and incentivise senior management to run operations without the fear of personal liability for administrative lapses. This will also accelerate the rectification of defaults by payment of penalties, reduce judicial backlog and free up resources which can be directed to more serious offences involving the element of fraud.

Respite to Independent Directors / Non-executive Directors against prosecution

The Ministry of Corporate Affairs (MCA) has recently clarified the protocol for prosecuting independent directors and non-executive directors (who are not promoters or key managerial personnel) (IDs and NEDs, respectively).

Indian company law ascribes personal liability on “officers in default” for company violations, but simply lists the categories of director / persons who can be held responsible for violations as officers in default, without setting out a hierarchy of liability flow. As a result, IDs and NEDs are as much at risk of prosecution as directors / persons involved in the company’s daily functioning.

The MCA has accordingly clarified that ID and NEDs must not be prosecuted:

(a) except for acts / omissions by the company undertaken with their knowledge (attributable through board processes) and consent / connivance, or where they did not act diligently;
(b) in respect of filing information or records with the MCA, maintaining statutory registers and meeting minutes, or compliance with statutory orders (unless a specific requirement is set out under the law/order), as these are not the responsibility of the ID / NED; and
(c) for lapses attributable to decisions of the board of directors or its committees.

As procedural safeguards, investigating authorities have also been directed to seek documentation from the company as well as from MCA filings to determine the involvement of the concerned officers at the time and date of default.

Takeaway: The clarification is a welcome move to shield IDs and NEDs from personal liability and prosecution for company lapses not within their domain. That said, IDs and NEDs may still be exposed to liability under other regulations such as tax, anti-bribery, anti-money laundering, environmental laws etc., which do not currently offer them similar relief.

Amendments to anti-money laundering law

The Finance Act, 2019 – see Part XIII – introduced amendments to the Prevention of Money Laundering Act, 2002 (PMLA) to tighten gaps and addressing ambiguities in the anti-money laundering law. These included widening the scope of “proceeds of crime” to include properties and assets created, derived, or obtained through any criminal activity related to the scheduled PMLA offence (even where not under the PMLA itself), and clarifying the continuing nature of the money laundering offence (that is, commission of the offence will run for as long as the offender is enjoying the proceeds of crime).

Takeaway: Amidst the growing number of financial crimes, the amendments to the PMLA attempt to make the existing anti-money laundering regime stricter and better armoured to detect suspicious transactions, creating a more robust environment for investment.

Procurement preference for local cybersecurity products

The Ministry of Electronics and Information Technology has mandated giving preference to locally produced cybersecurity products in all public procurement where intellectual property (IP) rights are owned by companies or start-ups incorporated in India.

While IP need not be registered in India, a firm claiming local preference should have the right to use and commercialise the product without third-party consents, and to distribute and modify. The notification clarifies that resellers, dealers, distributors, implementation or support-service agents (who may have limited rights to IP to enable transfer of rights to use, distribute and modify the product) will not be eligible for local preference.

Takeaway: The new procurement rules are geared towards boosting India’s national and economic security in this strategic sector.

Interested in hearing more from Osborne Clarke?

* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

Connect with one of our experts

Interested in hearing more from Osborne Clarke?

Related articles